l4 03 Measuring Purchasing Performance

Measuring purchasing

performance

Session 1

Introduction to performance management

in purchasing and supply

‘Adding value’ to the business

Learning objectivesAt the end of this session candidates will be

able to:� state the principles of performance

management in corporate business operations

� explain how performance management is undertaken within purchasing and supply operations operations

� explain how costs are identified and built up in business processes from acquisition of goods & services, added value, to final delivery to customers

� give examples of how performance measures are used as part of the wider principle of continuous improvement in business

� assess how performance management is linked to the need for 'continuity of supply' in a business operation.

Learning objectives (cont’d

� demonstrate the importance of effective supply chain performance management within the management of a successful operation.

� state the principle of 'Added value' with respect to the role of purchasing and respect to the role of purchasing and supply in a business operation and describe how this can be measured

� give examples of added value opportunities which Purchasing and Supply Managers can offer to a business.

� assess the 'Added value' opportunities afforded by improved performance in purchasing and supply and describe how this can be measured

Learning objectives (cont’d)

� assess the 'Added value' opportunities afforded by reducing inventory costs and administration and the use of consignment stocks in purchasing and supply and describe how this can be measured

� assess the 'Added value' opportunities afforded by Purchasing and Supply afforded by Purchasing and Supply Managers negotiating improved procurement and contract terms with suppliers and describe how this can be measured

� assess the 'Added value' opportunities afforded by improving operational efficiency in purchasing and supply and describe how this can be measured.

Corporate

Mission

statement &

strategy

Procurement

team/

management

challenge

Identify the

Procurement

strategic

targets

Implement

the

Procurement

performance

plan

Map the

process

elements

Decide on roles

&

responsibilities

Plan the

methodology/

outcome

targets

Feedback loop

1 2 3

4

5

67

Purchasing Performance Management within the Organisation

Diagram from workbook by Bryan Jones and

Improve each

management

process

The performance of

the Buyers

The performance of

Suppliers

The performance of the

Purchasing & Supply

function

Deliver

demanding

performance

targets

Manage &

communicate

results

Manage

continuous

improvement

ACTION BOXES

8

9

1011

8 a

8 b

8 c

Bryan Jones and John Oliver

Performance measures (KPIs)

� Strategic – long-term senior management objectives and targets

� Tactical – medium-term � Tactical – medium-term executive/supervisory management performance issues

� Operational – short-term process/transactional and issues.

Supply chain

� Inbound supply

� Intra-site management

� Outbound delivery

� How should purchasing performance be

measured in each of the above?

Cost analysis

Product Cost £ Percentage

Office chair

Labour 45 45%

Materials 30 30%

Overheads/

profit

25 25%

Selling price 100 100%

Continuous improvement

� A process of improving an organisation’s or supplier’s performance over a given period of time with agreed areas or criteria requiring improvement (CIPS)

� Continuous improvement is everyone’s responsibility, so Purchasing work with supply partners, organisational teams and individuals and customers to improve performance

� What recent continuous improvement gains are you aware that Purchasing have achieved in the supply chain in your organisation?

Continuity of supply

Verified purchasing

performance indicators

– cost & service

Minimise the

vulnerability in supply

markets

Purchasing practice,

innovation & product

research

Purchasing

core tasksEnsuring supply

continuity to the

organisation

– cost & serviceresearch

Purchasing represents

the organisation as an

attractive trading

partner

Purchasing :the key tasks within a business /organisation

Diagram from workbook by Bryan Jones and John Oliver

Supply continuity

� Must be achieved in a cost effective way, in line with organisational financial requirements

� Performance measures depend on what Purchasing want to achieve but may include outputs such as acquisition costs, delivery service, and production downtime due to no supplies.

Performance improvement

Categories include:

� Cost reduction

� Service improvement

� Reduced stock-holding

� Improved supplier base management

� Improved communications

� Within your organisation, what

performance issues do Purchasing most

want to improve?

Value chain (Porter)(Diagram from workbook by Ian Thompson)

Primary Activities:

Inbound

Logistics

Outbound

LogisticsOperations

Marketing

& SalesMargin

SecondaryActivities:

Firm infrastructure

Human resource management

Technology development

Procurement

Margin

Margin

Adding value

� Same goods and services for less cost

� Additional service benefits for same cost

� Reduced cost and additional service � Reduced cost and additional service benefits

� How has purchasing recently ‘added value’in your organisation?

� How are purchasing professionals ‘motivated’ to add value in your organisation?

Quality

Research and

Development

Production

The Purchasing

team

Inventory

Management

WarehousingAnd

Distribution

Finance

Human

Resources

Information

Technology

Customers

Suppliers

The Purchasing Process and its stakeholders

(Manufacturing environment)

Maintenance

Distribution

Sales andMarketing

Technology

NB: The hierarchical sequence of the business functions in this chart is not meant to give prominence to one

function over another, it is simply a convenient way of grouping stakeholders together in this environement

Diagram from workbook by Mike Fogg

Maximising added value opportunities demands effective communication and flow of information across the supply chain, with all parties engaging positively to identify continuous improvement

Costs of stock

� Cost of stock-holding (‘on cost’) =

acquisition+storage+staff+management/

handling

� Opportunity cost is related to what you

could do with the cash invested in stock-

holding

� Purchasing add value by contributing to

reduced stock-holding costs in many

ways, such as JIT delivery, and other

improved terms and conditions.

Total cost of ownership

Total cost of ownership (TCO) =

purchase price + COA + cost of operation +

cost of disposal

What are the opportunities for purchasing to

make savings, in this equation, through

improved contractual terms and

conditions with suppliers?

Operational efficiencies

Measures would be:

� salaries of buying team and purchasing staff

� premises and facilities costs

� systems (ERP) and process costs

� what opportunities might there be in your

organisation for purchasing to add value

through improved efficiencies?


performance

Session 2Session 2

Categories of performance measurement

Cost and price measures

Learning objectives

At the end of this session candidates will be able to:

� describe how purchasing and supply expertise can contribute to KPIs for a corporate business team

� list the main categories of key performance � list the main categories of key performance indicators (KPIs) within a purchasing and supply management operational department

� define the most appropriate KPIs which will make a contribution to profitability with respect to cost savings, services and inventory management

� define the most appropriate KPIs which will make a contribution to profitability with respect to basic workload control within a purchasing operation


� define the most appropriate KPIs which will make a contribution to profitability with respect to purchasing infrastructure and organisation

� define which purchasing and supply � define which purchasing and supply competencies are required to contribute effectively to profitability

� describe the market forces that determine a price within a market

� define, in cost accountancy terms, the main elements in building up the costs of a product or service

Learning objectives (cont’d

� analyse the cost information provided for a given product into the main percentages and illustrate this in a graphic format

� undertake an example of a detailed cost breakdown as part of a negotiation with a breakdown as part of a negotiation with a supplier, claiming a price increase due to an annual increase in labour costs

� give examples of cost elements which are not subject to increase over time for a given product

� summarise how overheads are treated in the build-up of the costs of goods and services.

The Corporate Business Plan

Marketing Plan Finance Plan People Plan Production Plan Supply Chain PlanSupply Chain Plan

Purchasing within a

Corporate Business Planning &

Management structure

Fig 3.1 Business Planning : The Purchasing Link

Purchasing Stores, Stock Handling, WIP, Transport & DistributionPurchasing Stores, Stock Handling, WIP, Transport & Distribution

Managing Purchasing

KPI’s and TargetsManaging Purchasing

KPI’s and Targets

Diagram from workbook by Bryan Jones

Performance measures (KPIs) 6

point plan

� Reliable

� Meaningful

� Focused

� Fair and balanced

� Capable of change and improvement

� Manage and measure the target.

Smart targets

� Specific – easily understood

� Measurable – what does success look like or how is it quantified?

� Achievable – otherwise de-motivational

� Relevant – to core business/service� Relevant – to core business/service

� Timed – realistic timescale

� Targets should be reviewed regularly to ensure they are still relevant and achievable

Generating KPIs

Consider:

� what is to be measured (strategic, operational or tactical)

� link to purchasing business plan

� compliance with 6 point plan� compliance with 6 point plan

� available data source

� valid means of measurement

� write target

� communicate to relevant others

� what is the difference between KPIs in public and private sectors?

Cost savings

Labour 45,000 45%

On sales turnover of £150,00, where cost of

sale is £100,000, what is the effect on profit if

the buyer makes a 2% cost saving on

materials?

Materials 30,000 30%

Overheads 25,000 25%

Totals 100,000 100%

The Purchasing

Purchasing Policy

and EthicsPurchasing Policy

and Ethics The Five ‘R’s’The Five ‘R’s’

Fig 3.4 The Purchasing Process LinksEach link is reviewed and assessed in order to develop

the full strength of the whole chain

Efficiency and effectiveness in process flow

can be evaluated by comparing current

achievement with industry or professional best

practice.

Process flow

The Purchasing

CycleThe Purchasing

Cycle

and Ethics The Five ‘R’s’

in BuyingThe Five ‘R’s’

in Buying

Evaluating Suppliers’

Offers

/ Price Analysis

Evaluating Suppliers’

Offers

/ Price Analysis

Supplier

RelationshipsSupplier

Relationships

The

Purchasing

process

Purchasing role in

the Organisation

Data & Information flow

Purchasing Partnerships

Continuous Improvement

Value for Money

Purchasing Partners Customer Partners

SCP 2005


Process flow

Best practice considerations:

� does purchasing have a clear role that is

readily understood?readily understood?

� does the buyer have clear guidelines for

working within the purchasing process?

� are purchasing basics such as the five

rights understood and adhered to?

� is the IT system meeting our needs?

� how effectively do we manage internal and

external customers?

Organisation infrastructure

Within an organisation purchasing may be

organised in many different ways:

� centralised or de-centralised

� Centre Led Action Networks (CLAN)� Centre Led Action Networks (CLAN)

� category purchasing

� consortium purchasing

� co-operative purchasing

� How purchasing ‘fits’ and works with other functions of the organisation and how it impacts on its ability to make savings and add value.

Purchasing competency

These are the skills, abilities and behaviours required to do the job and for any position include:

� knowledge, skills and attitude� knowledge, skills and attitude

� experience

� qualifications

� targets to be met

� what are the competencies that you need to do your job?

� how are they measured?

Cost and price

� Cost - total sum involved, including price, plus any additions that may be associated with ownership and use (CIPS)

� Cost is not, and should not be used as, a � Cost is not, and should not be used as, a synonym for PRICE or VALUE

� Price – the sum for which the product or service can be sold in the market.

Cost and price

� Buyers need to research the market and available suppliers to identify what is the best price

� In many cases it is important to � In many cases it is important to understand how that price has been arrived at, if the buyer is anticipating a longer term relationship

� Buyers need to be aware of cost-price movements in their market

� Measuring purchasing performance on price is a complex issue.

Costs

� Fixed costs – do not vary with output (rent,

rates)

� Variable costs – vary with output � Variable costs – vary with output

(materials)

� Total costs – sum of costs

� Marginal costs – cost of making one

additional unit (increment of variable cost)

Cost centres

Direct Labour £45 45%

If a product sells at £150 with costs of £100, then

the contribution or margin is £50, which initially

goes towards the operating costs of the business.

Materials £30 30%

Direct Overheads

£25 25%

Totals £100 100%

Cost management

� Costs can vary over the lifetime of a

project or supply period

� Purchasing are expected to deal with

price fluctuations, by monitoring suppliers price fluctuations, by monitoring suppliers

and reviewing cost/price analysis

information

� Purchasing’s performance will depend on

how accurately and effectively they

anticipate problems, monitor variations

and proactively negotiate or look for

alternatives to price increases.

Fixed costs

� All selling prices will include an element of fixed costs

� Fixed costs may be spread equally across the organisation or on an ‘activity basis’the organisation or on an ‘activity basis’(ABC)

� Buyers need to ensure that the selling price they accept contains fixed costs which are fair and relevant to that product or service only.


performance

Session 3

Inventory management measures

IT and data management

Learning objectives


� assess the advantages and disadvantages of holding stock in a business operation

� state the main elements of cost which will � state the main elements of cost which will accrue in the operation of a stores operation

� show diagrammatically how costs are allocated in sub-groups of inventory holding costs

� summarise the key performance indicators for a stores operation carrying inventory for a manufacturing operation

� evaluate how a manager would review the performance indicators linked to inventory held in terms of economy, efficiency and effectiveness

Learning objectives (cont’d)� state how IT systems are used in business

operations in general and where purchasing and supply systems support the process in particular

� define the main elements of a purchasing and supply IT system

� summarise the issues which, if measured, would add value to the management of purchasing and add value to the management of purchasing and supply

� summarise the issues which, if measured, would add value to the management of suppliers within an organisation

� appraise how developments in IT technology can assist purchasing and supply managers in both current performance and future continuous improvement issues

� formulate a set of performance Indicators which would assist a Purchasing Manager reduce costs and or improve service delivery.

Stock-holding

� Primary industry – bulk stock for sale,

MRO spares

� Secondary industry – raw materials and � Secondary industry – raw materials and

components inbound, added value, work

in progress, MRO spares, finished stock

for sale

� Tertiary industry – trading stock inbound,

admin and service stock, service delivery

stock.

Stock-holding

Factors affecting levels include:

� scarcity of supply

� uncertainty in supply market

� poor sales/demand forecast� poor sales/demand forecast

� inefficiency in stock control

� skills and experience of buyer

� production will want to avoid a ‘no stock’situation, Finance prefer limited stock-holding (push–pull effect)

� what other stakeholders will have conflicting interests?

Cost of stock

The REAL cost of holding stockThe REAL cost of holding stock

Cost of borrowing

money

The other uses to which

that money could be put

Financial

opportunity costs

or

that money could be put

Costs of stores

buildings & stockyards

Revenue costs of maintaining

stock in good condition, light

heat & maintenance

The human resources

needed to operate the

stores

Physical opportunity

costs

Total opportunity

costs∑∑∑∑

Fig 5.2

and

pl u s


Cost of stock

� Costs mount up from stock coming in,

storage and handling and despatch

� Costs depend on the type of stock and � Costs depend on the type of stock and

why it is held

� There may be ‘hidden’ costs relating to

damaged stock and obsolescence.

KPIs

� Financial KPIs (economy) – for example, stock turnover rate

� Operational KPIs (efficiency) – for example, amount or range and depth of example, amount or range and depth of stock

� Stores/stock delivery (effectiveness) – for example, service levels

Pareto analysis

80%

The The Pareto Pareto CurveCurve

Total

Value

Total Number

of Items

20%


Continuous improvement

Information from KPIs is used by different levels of management for different purposes:

� store operatives will want to measure � store operatives will want to measure weekly operational efficiency and effectiveness rates

� operational managers will want to plan workload monitor service delivery outputs in the medium term

� senior managers will look at trends to inform longer term strategic decisions.

IS/IT evolution

Integrate

O ptim ise

Innovate

Sustainable business

m odel for the

enterprise- E R P

culture

Im proved target

ach ievem ent

Increm ental

im provem ents

3

4

5The 5

IS /IT

evolutionary

steps

Integrate

O ptim ise

Innovate

Sustainable business

m odel for the

enterprise- E R P

culture

Im proved target

ach ievem ent

Increm ental

im provem ents

3

4

5The 5

IS /IT

evolutionary

steps

O perate

C onsolidate

Integrate

B asic Inform ation

L im ited processes

Individualistic

Separate independent

System s

D evelop team w ork

B etter cross functional

com m unication

Still som e variable

quality

Still som e

departm ental interests

E nterprise

inform ation

M ore inform ation

based decisions

A w areness of

im provem ent

opportunities

Im proved

perform ance

m easurem ent

achievem ent

B etter links to

strategic plans and

vision

C ross departm ental

integration

B etter relationship

m anagem ent data /

deliverables

im provem ents

A dded V alue

im provem ents

Im proved

supplier

m anagem ent

Im proved

quality

m anagem ent

A dded value H R

system s

Fig 6 .1 E volving inform ation system s

1

2

O perate

C onsolidate

Integrate

B asic Inform ation

L im ited processes

Individualistic

Separate independent

System s

D evelop team w ork

B etter cross functional

com m unication

Still som e variable

quality

Still som e

departm ental interests

E nterprise

inform ation

M ore inform ation

based decisions

A w areness of

im provem ent

opportunities

Im proved

perform ance

m easurem ent

achievem ent

B etter links to

strategic plans and

vision

C ross departm ental

integration

B etter relationship

m anagem ent data /

deliverables

im provem ents

A dded V alue

im provem ents

Im proved

supplier

m anagem ent

Im proved

quality

m anagem ent

A dded value H R

system s

Fig 6 .1 E volving inform ation system s

1

2


Typical supply chain databases

and outputs

Supply Chain IS / IT SystemSupply Chain IS / IT System

Stock

inventory

database

Supplier

database

Purchase

order file

databasePurchasing

reports

Supplier

Materials

Requirements

MRP

Customer

orders

Purchasing

decisions

Purchase

orders &

contracts

Supplier

performance

data

reports

Stores/stock

reports

Purchasing Staff

reports

Customer

reportsFig 6.2 Typical Supply Chain

Databases and outputsDiagram from workbook by Bryan Jones

Performance reports

IT systems generate a huge number of reports for purchasing to use to measure performance, including:

� spend per buyerspend per buyer

� cost per order raised

� supplier database details

� what types of data and information do you use in your organisation?

� while the above are objective, what subjective measures are used?

Managing supplier base

� Rank suppliers from highest to lowest by spend

� Identify the top 20% by spend value (Pareto)

� Concentrate relationship development � Concentrate relationship development activity with this group

� Review the critical nature of suppliers in the lower 80%

� Reduce the number of suppliers in the 80% list by ‘weeding’ out those with whom you no longer do business with or who have duplicates higher up the spend list.

IT developments

Recent developments include:

� interactive catalogues

� e-bidding/e-tendering

� supplier registration packages

� intranet developments

� how has IT impacted on your organisation and the ability of the individual purchasing professional to improve performance?


performance

Session 4

Why measure suppliers?

Steps in the supplier measurement process

Learning objectives


� explain the link between supplier performance and business success

� summarise the measurement of suppliers � summarise the measurement of suppliers within the procurement function

� define the contribution of measurement in 'quality management'

� argue that the measurement process contributes to the building of relationships

� distinguish between the measurement processes of supplier selection and supplier evaluation


� describe a situation where both business stakeholders co-operate in performance measures for mutual advantage

� define the key stages in the buying process

� describe the key steps in a pre-award � describe the key steps in a pre-award assessment process

� describe the key steps in a pre-assessment process - supplier evaluation

� analyse the importance of internal and external supplier feedback and corrective action

� formulate a process to undertake a continuous review of the supplier measurement process.

Measuring supplier performance

Supplier performance impacts on the

success of the whole organisation

� Measure over time and benchmark with

competitors or published indicescompetitors or published indices

� Select measurements and abilities that are

relevant and impact on success at each

level of the organisation

� Use appropriate tools and keep it as

simple as possible

� Share the results with the supplier and

other appropriate stakeholders.

Supplier performance

How does supplier performance

impact on the five rights?

� Price� Price

� Quantity

� Quality

� Place

� Time

Basic measures

� Delivery performance – history and trends

� Quality performance – history and trends

� Service performance – history and trends

� Pricing – how do they price and comparison with market prices?

Advanced measures

� Overall capabilities

� Financial history, strength and stability

� Inventory location and methods

� Innovation history and trends

� Organisations might use a ranking or

weighting system for the critical measures

when making supplier comparisons.

Importance of quality

Check product after

Check parts before

Check parts at suppliers

Joint design of product and

processes up

Check parts and process

Built in Quality

Designed in Quality

Checked for Quality

Figure 7.1Diagram from workbook by Bryan Jones and John Oliver

Traditional

product after assembly

before assembly

at suppliers plant

processes up

the supply

chain

and process

at suppliers plant

Progressive

Adversarial Relationships

Quality control Departments

Batch checking

Total Quality Management

ISO 9000 Certification

Supplier certification programmes

Cooperative relationships

Built in quality

Importance of quality

Purchasing might investigate supplier’s

� Production methods and workforce skills, training and development

� Service quality certification (for example, � Service quality certification (for example, ISO 9000)

� Quality management systems (for example, six sigma) and continuous improvement processes

� What measures are important for your organisation?

Building supplier relationships

Customers Purchasing

Information flow

Good relationships

Learning Activity 7dDiagram from workbook by Bryan Jones and John Oliver

Suppliers

Pressure to improve

Close Monitoring

Detailed measurement

Close relationship

Information flow

Performance feedback

Supplier development

Strategy

Co-ordinated spproach

Directors & senior managers




Figure 7.3Diagram from workbook by Bryan Jones and John Oliver

Partnership sourcingPartnership sourcing

Customer team

Measurement

Technical

Logistics

Buying

Production

Customer team

Measurement

Technical

Logistics

Buying

Production

Supplier team

Measurement

Technical

Logistics

Buying

Production

Supplier team

Measurement

Technical

Logistics

Buying

Production

Supplier relationships

� Short term – tend to be adversarial, ‘one-

off’, no relationship building, minimum

commitment

� Short to medium term – includes

negotiation, collaborative, relationship

builds

� Medium to long term – increased emphasis

on relationship and service benefits

� Long term – working towards partners

approach, relationship critical, shared

ideas and objectives.

Supplier assessment

� Pre-award

� Measuring supplier’s potential ability

� The concern is to select the right supplier so that measurement is designed to test how effectively the supplier can meet requirements and overall performance.

Vendor rating

� Evaluation process

� Measuring how well supplier has performed in meeting requirements

� Process may also include dimension of performance improvement to develop relationship.

Measuring supplier relationship

development

� Willingness to interact and proactiveness in seeking improvements

� Ability to listen and use feedback to improve performanceimprove performance

� Willingness and capability of devoting resources to relationship development

� Business case – impact on buyer’s ability to ‘get the right goods and services at the right time, place, quality and price’.

Supplier motivation(Paul Steele and Brian Court, published in Profitable Purchasing

Strategies, McGraw Hill)

Development -

Valued customer

Core -

Vital customer

HIGH

Attractiveness of customer

Nuisance -

Unimportant customer

Exploitable -

Negotiate hard

LOW HIGHRelative value of the account

Attractiveness of customer

Purchaser-supplier satisfaction(Reproduced from workbook by Mike Fogg)

acti

on

(0,10) (10,10)(5,10)

Quadrant A

Both parties

satisfied

Quadrant C

Purchaser dissatisfied

Supplier satisfied

Co

mple

te

Sat

isfa

ctio

n

Purchaser’s satisfaction

Su

ppli

er’s

sat

isfa

(0,5)

(0,0) (5,0) (10,0)

(10,5)

Quadrant D

Both parties

dissatisfied

Quadrant B

Purchaser satisfied

Supplier dissatisfied

Total

dissatisfactionMarginal

SatisfactionComplete

Satisfaction

Mar

gin

al

Dis

sati

sfac

tio

n

Pre-award assessment

� Basic supplier selection – one-off, low value

� Supplier categorisation – approved supplier, preferred suppliersupplier, preferred supplier

� Advanced supplier selection – key suppliers, high risk and/or value purchase.

Pre-award assessment

Step 1

Plan and

prepare

Step 2

Action and

individual

assessment

Step 3

Evaluate and

Report results

Step 4

Recommend

and feedback

Figure 8.2

Steps in a Pre Award Assessment Diagram from workbook by Bryan

Jones and John Oliver

Post-award evaluation

� Basic vendor rating – simple monitoring

(five rights)

� Advanced vendor rating – more review

and feedback, planned in advanceand feedback, planned in advance

� Supplier development – looking in greater

depth at process, management and

design issues

� Partner suppliers – suppliers have

different status.

Post-award evaluation

Plan

Pilot

Implement

Results

Review

Closedown

Feedback

� Feedback from different sources is used to measure and improve performance

� Suppliers need feedback to improve performanceperformance

� Purchasing need feedback from internal and external customers to improve performance

� Feedback mechanisms consider who, what, why, where, when and how.

Performance review schedules

� Level 1 – daily or weekly

� Level 2 - monthly

� Level 3 - quarterly

� Level 4 - yearly� Level 4 - yearly

� Special issues/Emergencies – as required

� Attendance at review meetings depends

on the circumstance but should include

the relevant level of authority.


performance

Session 5

About measurement tools -

performance measurement

Learning objectives


� demonstrate the different performance measurement 'tools' for various categories of supplier and activityof supplier and activity

� distinguish between qualitative and quantitative measurements.

� appraise the issues involved in designing measurement systems and ensuring data availability

� propose the involvement of other stakeholders in the measurement process.

� compare the benefits of a desk-based and visit-based approach


� summarise some generic methodologies for performance measurement

� explain and give examples of the basic process of vendor rating

� explain and give examples of the category � explain and give examples of the category approach to supplier performance measurement

� summarise the benefits of using weighted measurements

� explain the advantages of third party involvement and testing procedures

� plan audit processes to avoid financial or performance fraud.

Performance management

Tools and techniques used:

� Systems and information-based research

(ERP, DRP, MRP,)(ERP, DRP, MRP,)

� Performance management and

accreditation (ISO standards, Vendor

rating)

� Management theory and analysis (Pareto,

SWOT, ABC, Kraljic’s matrix)

Quantitative tools

� Objective, measure quantity such as component quality and response times to call-outs

� Results can be compared over time easily� Results can be compared over time easily

� Focus on efficiency and improvement

� When would you use such tools?

Qualitative tools

� Subjective, measure judgements such as

attitude to technology

� Can be difficult to measure and compare� Can be difficult to measure and compare

� Focus on improved perception,

effectiveness and contribution

� When would you use such tools?

Planning measurement

� Identify clear purpose and objectives

� Review what is in place already

� Identify resources needed

� Involve appropriate others, both internal

and external stakeholders

� Plan how to action, analyse results and

present feedback.

Process methods

� Desk-based research

� Supplier visits

� Meetings, interviews and discussions

� When would you use each of the above?

Measurement methods

� Statistical – simple, complex, weighted, cost ratio rating

� Perception based – 7 Cs, simple, complex ratingrating

� Research – financial analysis, references

� Standards and accreditation – TQM systems, ISO

� Self-assessment – supplier’s existing system or jointly planned.

The 7 Cs

� Competency

� Capacity

� Commitment

� Control� Control

� Cash

� Cost

� Consistency.

Third party involvement

� What are the advantages and disadvantages of using a third party to ‘test’ suppliers?

� External testing houses can test specific � External testing houses can test specific performance or check compliance (ABCB – Association of British Certification Bodies)

� A ‘mystery shopper’ may be used to check service quality.

Audit trail

� Financial audit

� Process audit

� Value for Money (VFM) audit.


performance

Session 6

Communication

Financial appraisal

Learning objectives


� determine how different types of communication can support business communication can support business relationships at all levels - strategic, tactical and operational

� explain the link between communication, performance measurement and relationship building

� analyse the importance of good communication mechanisms within performance measurement systems


� argue the importance of good communications in resolving disputes and managing conflict

� describe some of the different types of communication mechanisms available

� describe the role and input for the finance � describe the role and input for the finance department in performance management

� explain the benefit of undertaking corporate financial appraisal on appropriate suppliers

� demonstrate the advantages of specialist third party vs internal appraisal

� list specific financial assessment measurement tools and understand some specific application examples.

Communicating with suppliers

Directors Long term relationship development and overview

of performance

Figure 11.1 Diagram from workbook by John

Oliver and Bryan Jones

Managers

Supervisors

Operatives

Day to day communication,

perhaps with suppliers on site representatives

Short term communication and planning with suppliers on site representatives and supplier management. Some input to

performance review.

Medium term planning and communication including

detailed performance review and

planning.

Benefits of effective

communication

� Benefits exist for both supplier and purchaser and their organisations

� Better understanding of each other’s business and needsbusiness and needs

� Improved interpersonal relationships and interactions

� Joint planning to simplify and streamline processes and solve contract management problems

� What other benefits can you think of?

Effective communication

� Establish the purpose early in the relationship

� Adversarial style is likely to be less productive than collaborativeproductive than collaborative

� Strategic relationships are more critical than tactical

� Effective communication is essential to contract management.

Conflict

� Interpersonal

� Intrapersonal

� Intergroup

� Intragroup� Intragroup

� Interorganisational

� Can be positive!

� May be difficult to manage!

� When does it cause deadlock?

Conflict resolution

� Challenge perceptions and seek the facts

� Adopt a problem-solving approach, not a competitive one

� Deal with emotional issues calmly

� Focus on the future – what each party � Focus on the future – what each party wants to achieve

� Deal with emotions and behaviours.

Conflict resolution strategies

Encourage both parties:

� to take time out to calm down

� to see what the problem looks like from the other sidethe other side

� manage the substantives including the salami technique

� focus on common ground before moving into areas of profound disagreement

� highlight positives and attractiveness of offers.

Disputes

When dealing with disputes refer to

company policies and procedures; options

include:

� resolve yourself or

� refer to relevant level of management

� refer to arbitration or mediation

� refer to law.

Financial appraisal

How would you use the following information about suppliers to aid purchasing performance?

� Balance sheet analysis� Balance sheet analysis

� Income statement analysis

� Cost control analysis

� Credit rating checks

� Annual report analysis

� Dun and Bradstreet Report analysis

� Financial performance and ratio analysis

� Audit results.

Financial appraisal

Warning signs include:

� Redundancies and high staff turnover

� Increasing stocks and slower turnover

� Late presentation of accounts� Late presentation of accounts

� When has financial appraisal impacted negatively on selection of a supplier for your organisation?

� Occasionally organisations use third parties to conduct financial appraisal; when might this be useful?

Performance ratios

Return onCapital/Yield

CapitalEmployed

Profit

AssetTurnover

Sales

ProfitMargin

Profit

Cost of sales

Cost of sales

Creditors

CapitalEmployed

Sales

Stock

Sales

DebtorsFigure 12.1 Diagram from workbook by John

Oliver and Bryan Jones

Financial status ratios

Current

Assets

Current

liabilities

= Current ratio

Figure 12.5 Diagram from liabilities

Current assets

lessstocks

Current

liabilities

= Acid test !

Figure 12.2 Figure 12.5 Diagram from workbook by

John Oliver and Bryan Jones

Measuring purchasing performance

Session 7Session 7

Other performance measures

Supplier development and supplier account

management

Learning objectivesAt the end of this session candidates will be able

to:

� describe the internal and external commercial relationships found in most organisations

� propose other areas for measurement activity� describe the potential for joint performance

measurement initiatives� explain supplier surveys and benchmarking� develop and control suppliers in a more

positive way� demonstrate the value of being able to identify

key suppliers � define supplier development� define and understand supplier account

management.

Relationship management

� Internal and external relationships are not always appropriate – may be too close or not based on mutual respect

� Each party may be seeking to further their � Each party may be seeking to further their own interests at the expense of the other

� Inappropriate internal relationships may prevent effective flow of information needed for purchasing

� What experience have you of relationships that hindered purchasing performance?

Relationship management

Customers

Purchasing

Positive links and relationships

Figure 13.2 Diagram from workbook by John Oliver and Bryan Jones

Suppliers

Pressure to improve

Co-ordinated contacts/relationships

work to a common plan

Co-ordinated contacts/relationships

work to a common plan

Supplier development

Strategy

Supplier performanceParticularly for high-risk or high-value contract, in addition to financial strength, purchasing might assess supplier:

� overall performance

� workforce training and development workforce training and development

� quality assurance

� process/material flow

� housekeeping and management style

� environmental and ethical policies

� what additional measures do your organisations use?

Joint performance initiatives

Buyers Cross functional

Quality TeamBuyers

Cross functional

Quality Team

Suppliers

Cross functional

Buyers

Cross functional

Quality Team Cross Organisational

Cross functional

Quality Team


Suppliers Cross functional

Quality Team

Suppliers

Cross functional

Quality Team

Cross functional

Quality Team

Both organisations develop cross functional teams.

Initial tensions and some

difficulties

Adversarial

Working relationships develop

Two way communication

brings teams closer together

Working relationships become well developed

Good relationships mean

teams have little between them

Matured teams function as one “organisation”

Quality Team

Benchmarking

� Internal

� Competitive

� Functional

� Generic

� Phases of a benchmarking exercise are planning, analysis, development, improvement and implementation and review

� How is benchmarking used in your organisation?

Benchmarking

Problem areas include:

� selection of appropriate comparator

� duration of the exercise to make it � duration of the exercise to make it

meaningful

� can be time consuming and heavy on

resources

� availability of the right information.

Supplier surveys

An easy and popular way of getting

feedback on purchasing performance:

� need to incentivise the supplier� need to incentivise the supplier

� undertake the same survey regularly to

assess trends

� gather quantitative and qualitative

information

� can be anonymous!

� act on the feedback!

Supplier relationships

It is not always appropriate to work towards a

cooperative relationship:

� organisation’s culture may be more

adversarialadversarial

� long-term working is not appropriate –

one-offs are more common

� geographical or market issues might

prevent closer working

� time and resources may not be available

� what other reasons can you think of?

Supplier account management

Leans towards working with suppliers.

If beneficial will include full

partnerships with key

suppliers

Leans towards competitive

relationships with suppliers.

Buyer aims to be in charge

Tries to adopt a relationship

strategy based on need and

optimised results


Co-operativeCo-operative Adversarial Adversarial BalancedBalanced

Co-operative strategies

and partnerships.

Supplier mentoring and supplier development tools

Needs to control suppliers

through supplier account

management or similar

Will apply a range of tools

and techniques according

to requirements.

Key suppliers

Might be critical for a number of reasons:

� high demand, scarce supply

� volume of business� volume of business

� value of spend

� level of relationship developed

� specialist skills or service benefits.

Key suppliers

High

Bottleneck

=Low value, high-risk

Bottleneck

=Low value, high-risk

Strategic/Critical

=High value, high risk

Strategic/Critical

=High value, high risk


Relative spend Low

Supply

Exposure(market

Risk)

High

Low value, high-risk High value, high risk

Leverage=

High value, low-risk

Leverage

=High value, low-risk

Routine/non critical=

Low value, low-risk

Routine/non critical

=Low value, low-risk

Supplier account management

� Develop as full an understanding as possible

about the supplier

� Involve the supplier and relevant internal � Involve the supplier and relevant internal

staff in building and developing the

relationship

� Identify key account responsibilities to

specific staff and review progress regularly

� Requires time and resources!


performance

Session 8

Why measure buyer’s performance?

Cascading targets and objectives

Learning objectives


� describe the benefits to the buyer of good performance management

� summarise the aims of measuring buyer performance for the organisation performance for the organisation

� distinguish between periodic, on-going and annual measurement options

� explain the links to reward and advancement

� summarise problems with poorly managed measurement schemes

� explain the wider national view and structured approaches such as 'Investors in People'


� define the concept and benefits of managing through objectives

� summarise the process by which targets and objectives cascade from the business planning process

� design positive objectives which conform to the SMART approach to objective setting

� demonstrate the possibilities of different timescales for objectives

� analyse problems which can arise during objective setting

� demonstrate the benefits of feedback, audit and review of the objective setting process.

Performance Agreement

• Agree role description

• Agree plans to achieve

performance and development

objectives

Annual Review Interim ReviewContinuous feedback,

Measuring buyer

performance

• Review performance

against:

•performance objs.

•development plan.

•key areas of

responsibility

Interim Review

• Review progress to

date against

performance and

development objs.

• Review current validity

of objs.

• Note any changes in

employee role or

competences

support and

information on

contribution to overall

business objs.

Underpinned by a

culture of openness,

trust and respect

Purpose of review

� To review current performance

� To set objectives for future performance

� To aid manpower planning

� To assess training & development needs

� To determine pay increases.

Benefits of review

� Sharing of aims and objectives

� Clearer working goals

� Stimulation of new ideas

� Provides feedback on performance

� Opportunity to identify problems

� Motivates buyer

� Identifies training/development needs.

Linking performance to reward

� Advantages include individual recognition of individual contribution and motivation of top players

� Disadvantages include potential � Disadvantages include potential demotivation of poorer performers and perceived unfairness

� Purchasing do need to find ways of developing and nurturing talent and high achievers.

Setting objectives

� Linked to overall business objectives (bigger picture)

� Must be clearly understood and stretching but not unrealisticbut not unrealistic

� SMART – Specific, Measurable, Agreed, Realistic and Relevant, Time-bound

� Identify and discuss barriers to achievement.

Cascading objectives(Diagram from workbook by John Oliver and Bryan Jones)

Format of objectives

Action verb + Object + = End result

(To do something) (to something) (to achieve a

measurable

outcome by

a specific time)

Timescales for objectives

� May be short, medium or long term

� Should be reviewed regularly to identify

achievement and consider whether still achievement and consider whether still

appropriate if medium or long term

� Daily targets are not usually set during

formal annual appraisal.

Constructive feedback

Prompt

Factual

Supportive

Respectful FEEDBACK


performance

Session 9Session 9

Appraisal and evaluation techniques

Training and staff development

Learning objectives


� describe informal and formal appraisal and evaluation techniques

� evaluate the benefits of a quantitative or � evaluate the benefits of a quantitative or qualitative approach

� explain the main components and issues in an interview based appraisal process

� summarise the self-assessment approach to appraisal

� propose the involvement of others in the appraisal process

� define the issues which can arise if the appraisal process fails to work effectively


� describe the stages and benefits of developing a training needs analysis (TNA)

� distinguish between job profiles and job descriptions and how they influence a TNA

� argue the benefits of focussed rather than � argue the benefits of focussed rather than non-focussed approaches to training and staff development

� summarise the different types of training available

� explain the concept of continuous professional development

� evaluate the success of training for the individual and the business.

Performance review

Performance improvement

Development

MotivationUnderstands contribution

Purpose of performance

review

improvement

Based on analysis not judgement

Effective performance review

� Enable two-way discussions of present and future performance

� Related to measurable work objectives (to aid objectivity)

� Focus on behaviours and facts, not fuzzy � Focus on behaviours and facts, not fuzzy judgements of personal qualities

� Set clear standards and challenging performance objectives

� Identify training and development needs

� Focus on potential career steps and goals.

Self review

� Usually qualitative, seeking personal view of performance during the period under review

� Some buyers will overrate themselves and � Some buyers will overrate themselves and some will do the opposite, so encourage them to provide evidence

� Encourages the buyer to consider future career and what training and development is required.

Formal review process

� Consider preparation required

� Make appointment

� Issue self-review form

� Receive completed self-review form

� Set agenda for interview� Set agenda for interview

� Conduct interview to set objectives and identify training and development needs

� File documentation

� Follow up with buyer to review progress on objective achievement

� How would the above differ to an informal review process?

Quantitative measures

� Objective measures based around numbers and values

� Usually task based

� Focus on efficiency and improvement

� To increase number of invoices processed per week by 10% over the next 6 months.

Qualitative measures

� Subjective – measure judgements, such as attitude to customers

� Can be difficult to measure and turn into targetstargets

� Focus on improved perception, effectiveness and contribution

� To improve meeting skills to be able to take over as chair of team meetings by end of year .

Preparing to review

� Gather information on performance –previous appraisal, job description, reports on work performance, interviews with managers buyer works for, customers, supplierssuppliers

� Collect facts and evidence, not opinion

� Consider issues and how to address

� Compile and issue agenda

� Make notes to inform discussion.

Review meeting

� Two-way discussion

� Aim for a constructive/positive approach

� Examine constraints and opportunities

� Summarise and agree targets� Summarise and agree targets

� Identify training and development needs.

Follow-up

� Make sure agreed support is provided and

no barriers to achievement persist

� Carry out interim review to check progress� Carry out interim review to check progress

� Do not stop day-to-day monitoring and

review of performance because there is a

formal review system.

Training needs analysis

� Identify performance gap which is the gap between the current performance and what is required

� Training problem - or not?� Training problem - or not?

� How can needs be met?

� How will success be measured?

Meeting development needs

� Training courses and professional

qualification

� Open learning materials� Open learning materials

� Coaching or mentoring

� Work shadowing experienced colleagues

� Deputising for experienced colleagues.


performance

Session 10

Information and individual performance

management

Buyer and supplier performance links

Learning objectivesAt the end of this session candidates will be able to:

� describe the importance of data to the measurement process

� explain the need for access to the corporate and departmental planning process, and effective systems design

� summarise the types of data which may be used � summarise the types of data which may be used

� list the sources of data which may be used

� evaluate the weaknesses of existing approaches to performance measurement

� argue that there is a need and benefit from relating performance to wider issues

� define potential performance measurement links to suppliers

� define possible performance measurement links to other stakeholders.

Data

In order to objectively review performance,

data must be:

� relevant� relevant

� up-to-date and cover the period under

review

� valid and reliable

� accurate, fair and impartial

� facts and evidence, not opinion and

judgement.

Data collection

� Can be time-consuming

� May not be available in the right format

� May be qualitative or quantitative

� May be standard or specific to that job.

Types of data

� Basic or transactional

� Departmental related to internal

performance

� Operational performance� Operational performance

� Strategic performance.

Sources of data

� Departmental systems

� Operational systems

� Personally managed systems

� Customers – internal and external� Customers – internal and external

� Managers’ report to

� External suppliers

� What is 360 degree appraisal?

How to ‘kill’ performance review

� Lack of commitment and support from the top

� Insufficient time allowed for preparation

� Rushed interview

� Lack of skills (reviewers)

� Poorly designed scheme that is complex � Poorly designed scheme that is complex and time-consuming

� Inaccurate recording

� No buy-in (employees)

� Concentrating on the positive or negative

� Avoiding uncomfortable issues

� Lack of organisational context

� Lack of follow-up

� Information not used by organisation.

Stakeholder involvement

� Relevant stakeholders to the organisation add significant information that may not be available elsewhere

� In order that purchasing meets its overall � In order that purchasing meets its overall objectives buyers must be ambassadors at every interface with stakeholders

� What is the degree of stakeholder involvement in your appraisal?

Buyers and suppliers

� Suppliers assess buyer performance

from an external perspective

� Data will relate to operational and

personal issues – for example,

interpersonal skills relating to negotiation,

courtesy, helpfulness

� How are selected suppliers involved in

your performance appraisal?

Documents

l4 03 Measuring Purchasing Performance